Barofsky Says Criminal Charges Possible in Alleged AIG Coverup

Neil Barofsky, special inspector general for the Troubled Asset Relief Program (TARP), testifies at a House Oversight and Government Reform Committee hearing on preventing home foreclosures in Washington, D.C., on March 25, 2010. Photographer: Brendan Hoffman/Bloomberg

April 28 (Bloomberg) -- Neil Barofsky was unpacking boxes
in December 2008 when the stench of sewage wafted through the
hallways at the 168-year-old Main Treasury Building. The space
assigned to him as head of the Office of the Special Inspector
General for the Troubled Asset Relief Program, or SIGTARP, was
shoehorned into the basement, three floors below U.S. Treasury
Secretary Henry Paulson’s offices.

“They eventually discovered a broken sewer main beneath the
floor,” says Barofsky, 40, adding that he doesn’t think any
slight was intended by relegating him to the malodorous
quarters. Still, he says with a smile, “I wasn’t given the prime
real estate in Treasury.”

The incident was noted by Beltway insiders, Bloomberg
Markets magazine reports in its June issue.

“It became an apt metaphor for the foul relations between
Treasury and SIGTARP,” says Michael Smallberg, an investigator
at the Project on Government Oversight, a Washington watchdog
group.

That tense relationship has grown out of Barofsky’s mandate
to monitor and root out fraud and waste in the management of
TARP, the $700 billion program passed in October 2008 to remove
toxic debt from the banks. The special inspector general, in a
series of reports, interviews and congressional hearings, has
heaped criticism on the Treasury Department’s operation of the
program.

Barofsky’s most recent broadside came on April 20, when a
SIGTARP report labeled a housing-loan modification program
funded with $50 billion of TARP money as ineffectual.

230,000 Homeowners

Treasury spokesman Andrew Williams counters that the
program has resulted in modifications for more than 230,000
homeowners.

The TARP watchdog has also criticized Treasury Secretary
Timothy F. Geithner in reports and in congressional testimony
for his handling of the process by which insurance giant
American International Group Inc. was saved from insolvency in
2008, when Geithner was head of the Federal Reserve Bank of New
York.

The secrecy that enveloped the deal was unwarranted,
Barofsky says, adding that his probe of an alleged New York Fed
coverup in the AIG case could result in criminal or civil
charges.

In Senate Finance Committee testimony on April 20, Barofsky
said SIGTARP would investigate seven AIG-linked mortgage-related
securities similar to Abacus 2007-AC1, the instrument
underwritten by Goldman Sachs Group Inc. that is at the center
of a U.S. Securities and Exchange Commission lawsuit filed
against the investment bank on April 16.

Leading the Charge

“I’ve been in contact with the SEC,” he told the committee.
“We’re going to coordinate with them, but we’re going to lead
the charge. We’re going to review these transactions.”

Barofsky and Geithner’s offices have gone toe-to-toe over
AIG, alleged lax oversight of TARP funds and even over the
question of whom Barofsky reports to.

Barofsky, a former federal prosecutor who was once the
target of a kidnapping plot by Colombian drug traffickers, says
he’s also looking into possible insider trading connected to
TARP. He says his agency would want to know if bankers bought
stock in their companies before it was made public that their
institutions would get TARP money, for example.

“There was a time when, if you got that word the stock
price would go up, and if you were to trade on that information
prior to the public announcement, that would be classic insider
trading,” Barofsky says.

‘Tea Partiers’

A Democrat named by a Republican president, Barofsky says
missteps by both the George W. Bush and Barack Obama
administrations are to blame for TARP’s failures.

“There’s a reason there are Tea Partiers out there, and
when you look at it, anger at the bailout is one of the first
things they talk about,” says Barofsky, referring to the anti-Obama political movement. “This Treasury Department and the
previous Treasury Department bear some of the responsibility for
not being straightforward with the American people.”

Barofsky criticized Geithner’s predecessor, Paulson, in an
October 2009 report, saying Paulson publicly described the
initial nine TARP bank recipients as healthy when he knew that
at least one of them risked failure.

In a letter responding to Barofsky, Assistant Treasury
Secretary Herbert Allison wrote: “Any review of such
announcements must be considered in light of the unprecedented
circumstances in which they were made.”

Geithner and Paulson both declined to comment for this
story.

Praise from Grassley

Barofsky, who has thinning jet-black hair and favors dark-gray suits, has won praise from both sides of the aisle in
Congress.

“The special inspector general for TARP hit the ground
running,” says Senator Charles Grassley, an Iowa Republican who
helped draft the legislation creating SIGTARP. “He’s the kind of
watchdog taxpayers need and deserve.”

From the day Congress created it, TARP has been troubled.
Paulson crafted it as an initiative to buy the toxic assets that
were then threatening to capsize the world’s banking system.
Since then, the Treasury and Congress have transformed it into a
hydra-headed beast encompassing 13 financial aid plans.

TARP had invested $204.9 billion in 707 banks, thrifts and
credit unions through its Capital Purchase Program as of March
31; $69.1 billion remained to be paid back. It has committed to
paying out $39.9 billion to modify mortgages, though it has
disbursed only $91 million.

Hydra-Headed TARP

The Treasury Department has pledged to dole out tens of
billions more to programs as varied as the Unlocking Credit for
Small Business initiative and the Automotive Industry Financing
Program, through which it owns 60.8 percent of General Motors
Co. and 9.9 percent of Chrysler Group LLC.

Says Representative Jeb Hensarling, a Republican from Texas
and former member of the Congressional Oversight Panel that
guides TARP policy, “It’s almost a program that defies
oversight.”

Of the $700 billion in TARP funding authorized by Congress
in October 2008, the Treasury has planned for $545.1 billion in
investments, committed $489.8 billion and disbursed $380.3
billion as of March 31. Institutions had repaid $180.8 billion.

SIGTARP has more than 40 agents, including former Secret
Service, Federal Bureau of Investigation and Internal Revenue
Service investigators, who sport blue windbreakers emblazoned
with the SIGTARP seal.

They are authorized by Congress to carry guns -- Barofsky
does not -- make arrests, and subpoena and seize records.

Still Too Big

In its late-January report, SIGTARP said that the banks
rescued by TARP remained “too big to fail.” They still have an
incentive to make risky wagers in order to generate the profits
that will reward their executives, the report says.

“The definition of insanity is repeating the same actions
over and over again and expecting a different result,” Barofsky
says. “If the goal of TARP was to make sure we don’t have
another financial collapse, well, obviously it’s made the
likelihood of that much, much greater.”

Neil Michael Barofsky’s background prepared him well for a
job that involves law enforcement, economics and political
diplomacy. Born in Abington, Pennsylvania, a suburb of
Philadelphia, he simultaneously earned degrees in economics and
international relations from the University of Pennsylvania. He
graduated magna cum laude from New York University Law School in
1995.

He soon landed at what is now Morvillo, Abramowitz, Grand,
Iason, Anello & Bohrer P.C., a New York-based firm filled with
former prosecutors.

Dream Job

It was Barofsky’s ticket to what he says was his dream job,
as a lawyer for the U.S. Attorney’s Office for the Southern
District of New York, where he started in 2000.

Toiling in the criminal division’s offices at 1 St. Andrews
Plaza in Manhattan, Barofsky acquired a reputation as someone
who worked prodigiously to build cases.

Beginning in 2004, Barofsky worked on “Tango Chaser,” an
investigation into the Revolutionary Armed Forces of Colombia,
or FARC, a rebel army that funds its operations partly through
narcotics trafficking. The still-ongoing probe has resulted in
the indictments of 50 traffickers.

In 2005, Barofsky learned he had been the target of a
kidnapping plot during one of his visits to Colombia. A female
informant who was planning to set him up relented and later told
him of the plan. Barofsky keeps a FARC bayonet on his office
windowsill as a memento of the case.

Refco Prosecutor

Barofsky’s most prominent white-collar case was the
successful prosecution of Refco Group Ltd. President Tone Grant,
who was found guilty of conspiracy, fraud and money laundering
in April 2008.

Barofsky was running a mortgage fraud enforcement program
for the Southern District in November 2008 when Garcia took a
call from the White House personnel office, which was looking
for a special inspector general for TARP.

“The most qualified person for this job is you,” Garcia
recalls telling Barofsky. “This is the crisis of the hour.” Then
Garcia warned him: “People will not like you.”

Barofsky wasn’t intimidated.

“Neil is not deterred by the prospect of powerful people or
his supervisors coming down on him,” says Anthony Barkow,
executive director of the Center on the Administration of
Criminal Law at New York University, who worked with Barofsky in
the U.S. Attorney’s Office. “He is an independent thinker and
not afraid to ruffle feathers.”

Against the Grain

David Kotz, inspector general of the SEC, says, “Neil
Barofsky has done a laudable job of taking aggressive positions
where necessary. Inspector generals at one time or another must
be prepared to go against the institutional grain.”

Geithner’s Treasury Department disputes the assertion that
it has not been open about TARP.

“This is frankly one of the most transparent programs in
the government,” says Tim Massad, chief counsel of Treasury’s
Office of Financial Stability. “We’ve probably had 200 meetings
with Neil and his staff.”

In April 2009, Treasury asked the Justice Department for a
ruling on whether Barofsky and SIGTARP reported to Secretary
Geithner. In a letter to Justice, Barofsky argued that he
reported only to the president.

“We are absolutely an independent agency,” he says.

Treasury withdrew its request.

TARP’s Small Business

In February of this year, the department moved to exclude
the Small Business Lending Fund from Barofsky’s oversight. The
program is funded with $30 billion of TARP money.

“On its face, it looks like Treasury is trying to supersede
SIGTARP’s position by having the program operate outside TARP,”
says Smallberg of the Project on Government Oversight. “Barofsky
is certainly a thorn in the side of Geithner.”

Meanwhile, Barofsky’s investigators continue to lay into
TARP. In a January report, SIGTARP cited an unnamed money
manager in TARP’s Public-Private Investment Program, which buys
toxic assets, saying the person sold a recently downgraded
mortgage-backed bond from a company fund, then promptly
purchased the same security in the same amount at a higher price
for a fund backed by TARP money.

Allison responded in a letter to Barofsky that the
suspicious trade was referred to SIGTARP by Treasury compliance
officers in the first place.

Insurance Banks

In a December report, Barofsky showed how insurance giants
Hartford Financial Services Group Inc. and Lincoln National
Corp. bought tiny thrifts -- one with just $7 million in assets
-- to qualify for the TARP Capital Protection Program, which is
designed to encourage bank lending. Hartford and Lincoln used
the more than $4.3 billion in TARP funds they received almost
entirely to finance insurance operations, according to the
report.

“Treasury didn’t have to approve that,” Barofsky says.

Allison wrote SIGTARP that buying troubled assets from
insurance companies was part of TARP.

Janet Tavakoli, founder of Chicago-based Tavakoli
Structured Finance Inc., says Barofsky hasn’t been aggressive
enough. She says SIGTARP should be running criminal probes of
the bankers who underwrote and managed the collateralized debt
obligations that were at the center of the financial meltdown.

CDOs are bundles of mortgage-backed bonds and other debt
sold to investors.

Tavakoli says the CDO managers sometimes replaced
relatively high-quality securities with new ones that were more
likely to default.

‘Phony Labels’

“It is securities fraud if you take securities and package
them and knowingly pass them off with phony labels,” she says.

Barofsky says investigations related to the underwriting
and sale of CDOs are ongoing.

Barofsky is no longer confined to a fetid basement office.
SIGTARP is now in a brown-granite building on L Street, nine
blocks away from the Treasury. Sitting in his office, the
investigator says he was at first surprised by the resistance he
got from the Treasury to his inquiries.

“When I took the job, it wasn’t like I had really
contemplated for a millisecond the political aspects,” says the
lawman, sipping from a can of Diet Coke.

Barofsky says he’s battling an entrenched culture of
secrecy in the Treasury and elsewhere.

“One of the important lessons that I hope will be learned
from this entire financial crisis is that the reflexive reaction
against transparency, that disclosure will bring terrible
things, has not been proven true,” he says.

Culture of Secrecy

He offers the AIG bailout as an example. For more than a
year, the New York Fed kept key aspects of the AIG bailout
secret, including details of its own involvement and its
decision to have AIG pay the insurer’s bank counterparties 100
cents on the dollar on the credit protection they’d bought
against about $62 billion in CDOs.

In a November report, SIGTARP criticized Geithner’s failed
efforts to obtain discounts from the banks.

After the banks had been paid in late 2008, a lawyer from
the New York Fed sought to have AIG keep the banks’ identities
under wraps, as well as data about the CDOs that would have
revealed which firms had underwritten the toxic bonds and which
ones had managed them.

“There’s a lot of things about AIG that were not disclosed,
based on the assumption that the sky would fall,” Barofsky says.
“Transparency does a lot more good than bad.”

TARP Police

Barofsky says the question of whether the New York Fed
engaged in a coverup will result in some sort of action.

“We’re either going to have criminal or civil charges
against individuals or we’re going to have a report,” Barofsky
says. “This is too important for us not to share our findings.”

He won’t say whether the investigation is targeting
Geithner personally.

In a statement, the New York Fed said: “Allegations that
the New York Fed engaged in a coverup of its intervention in AIG
are not true. The New York Fed has fully cooperated with the
Special Inspector General.”

Barofsky’s to-do list grows. SIGTARP now has 120 employees,
has initiated 20 audits and was involved with 84 investigations
as of March 31. In January, it opened a New York office, with
San Francisco and Los Angeles branches scheduled for later this
year.

As long as the Treasury Department continues throwing money
at the financial crisis, Barofsky’s TARP police will be
watching.